Cryptocurrency is like stocks. Neither have any inherent value. The only reason they’re worth money is because people believe they are enough to trade real money for them, which isn’t so crazy, because money has no real inherent value either. Money, stocks and cryptocurrency are all just tokens that we assign value to on faith.
The value of these tokens are based on two things: scarcity and the reputation of the person issuing them. For example, the U.S. government says, “We’re putting 10 trillion dollars into circulation. You can trade 1,000 of them for a cow. The more stable our economy is, the more our dollars will be worth. Trust us.” IBM says, “We’re putting one billion stocks in circulation. You can trade ten of them for a cow. The more profitable our business is, the more our stock will be worth. Trust us.”
These promises are worthless until someone actually accepts these tokens as payment for real world goods. Bitcoin was just an empty promise until people started accepting it as payment. Once other people saw that happening, they said, “Holy cow! This is worth real money!? Let’s buy and sell it too.” The more demand there was for it, the more money people would pay to get it, and the more it became worth, just like stocks. So you can think of Bitcoins like stocks in Bitcoin Incorporated. It’s even sold on cryptocurrency exchanges that work like the stock market.
The difference between cryptocurrencies and stocks is that there is no Bitcoin Incorporated. There’s no head office, CEO or profit margin, because there’s no product being sold. Bitcoin is like a stock in a company that doesn’t exist. There are just a bunch of servers all over the world owned by volunteers, which run programs that were originally invented as a way to back up digital files in multiple locations simultaneously and securely.
Hospitals and big businesses used this technology so they could guarantee they’d never lose important records, and those records could never be tampered with. So employees couldn’t go back in and cook the books to cover up their mistakes or hide fraud. The system works sort of like Utorrent. There are a bunch of people all over the world running a program that allows their computers to collaborate with each other to write chains of data. Unlike torrent programs though, the data isn't copied. Each server just shares the responsibility of creating and hosting a set amount of data.
The value of a Bitcoin isn't backed by this data. The data is the money. So a Bitcoin mining machine is like a money printing press, but no matter how many mining machines are online, they collectively only create a set amount of data every day, which is distributed between all the printing presses. Ultimately, the Bitcoin printing presses will produce 21 million bitcoins, and then they will stop producing new ones. I've heard the number 21 million is supposed to reflect the amount of gold in the world, which is in theory should make Bitcoin the gold standard of cryptocurrency. The last bitcoin will be generated sometime around the year 2040. This system makes inflation impossible, but while Bitcoins are still being created, the more miners there are, the less each person gets to keep.
If this sounds rediculous, think of Bitcoins like digital diamonds. Diamonds have no inherent value either. They’re just common rocks. The only reason they seem scarce is because DeBeers has a monopoly on the diamond supply and only lets out a few at a time. Plus, they’ve hyped up the value of diamonds so much that people believe they’re worth money.
If DeBeers flooded the market with all the diamonds they’ve horded, the price of diamonds would plummet, and your warehouse would become full of stupid, worthless rocks. Bitcoin miners can’t flood the market with Bitcoins and crash their value like DeBeers could with diamonds. They can’t split or reverse split the amount of Bitcoins it has issued like IBM can. They can’t print 10 trillion more Bitcoins tonight and crash its value like third world countries sometimes do with their money supply. A foreign country can’t overthrow Bitcoin and crash its economy like America did to Iraq. In a crazy, turbulent world, Bitcoin will always be stable as long as the internet exists. That’s more than most currencies can boast.
After people started paying hundreds of dollars for Bitcoins, other volunteers started running similar programs on their servers, creating their own cryptocurrencies and selling/trading them on exchanges. The founders of one of these exchanges, Bitshare, got thinking, if people will pay money for data records, why not make those records tied to actually human activity? Reddit and Facebook have huge servers that are filling up with bits of data. If we make a social media site that records its activity logs using blockchain databases like Bitcoin does, instead of just dumping them on regular servers, then we could monetize people’s activity on the site and then pay people to use it with the “money” their activity creates. Thus, Steemit.com was born. Steemit is a blogging platform that pays you in a cryptocurrency called STEEM to post, upvote and comment on its content.
I explained all this to my brother a few days ago, and he replied, “So where’s the scam? How are the guys running this thing making money? There’s got to be a pyramid scheme in there somewhere.”
The answer to that question isn’t black and white, but before I explain it, I have to begin by saying, Steemit doesn’t cost anything. You don’t have to pay-to-play or buy anything. You just use the site, and they give you free cryptocurrency. If that’s a scam, then it’s one I want to be a part of.
The owners can make money by selling STEEM on the site. If you buy it, it might go up in value like Bitcoin, but it could crash if it never catches on. This makes buying STEEM tantamount to investing in penny stocks. The difference between STEEM and penny stocks is that penny stocks crash when the company doesn’t make enough money. STEEM will crash if Steemit doesn’t give away enough money. If your business model is based on giving away free money, it probably won’t fail.
Granted, STEEM isn’t technically free. You have to trade your labor for it in the form of blogging, voting and commenting. By blogging on Steemit, you’re technically working for free in the sense that the owners don’t pay you out of their pocket; they pay you in “stocks” that don’t cost them anything.
If there’s a catch to Steemit, it’s this. Like any business that issues stocks, it doesn’t put all its stocks on the market. The creators of Steemit keep most of the STEEM, just like Bill Gates and Steve Ballmer own most of the stock in Microsoft. So, while you might get sort-of rich investing in Microsoft stocks, you’re making Bill Gates and Steve Ballmer filthy rich without them having to invest any money.
The big question is, will cryptocurrency and Steemit continue to grow, or are they a passing fad? I believe cryptocurrency is here to stay for two reasons. First, as I’ve already mentioned, it’s a stable currency that transcends national boundaries. Second, it’s a useful way to buy products from online black markets without having to swipe your debit card. As long as there’s an internet black market, there will be a real world need for cryptocurrency.
However, the future of cryptocurrency doesn’t depend on the black market. You can already use it to buy regular goods and services. You can even walk into many brick and mortar stores and spend it. Since cryptocurrency is already an established medium of exchange, I see no reason why people would all of a sudden stop using it… unless the entire internet crashed, which means the apocalypse has happened and every currency will probably be worthless at that point anyway.
The future of Steemit and thus the value of the STEEM cryptocurrency depends on people using the site. In order for STEEM to skyrocket in value, the site needs to attract millions of more users. Steemit is currently in its beta stage, which means it still has a lot of bugs to fix and features to add. Below is a list of things Steemit needs to do in order to go viral:
Make formatting posts easier.
In order to center pictures, add bold letters, italics or links, you currently have to use markup language, which isn’t hard to master, but it’s very tedious. In a world where everything is becoming simpler, Steemit isn’t going to go mainstream if its users have to learn a new formatting language to use the site. Most people will just stick to one-click sites like Reddit and Facebook. You can use this site to type your posts in and add formatting easily, but this feature really needs to be built right into Steemit.
Put all the features on one page
For a moment in time I thought Google + would replace Facebook as the premier social media site because Facebook has so few features. Google + took all the best new technology and put it together in one site… but not really. Instead of giving its users one home page where they could use all these great tools, they created a dozen different sites that you have to jump back and forth to. The user experience is fragmented and frustrating. Steemit is currently going down the same path. It has a lot of innovate tools, but you have to make 15 different accounts with 15 different services to get the most out of Steemit. If Steemit can’t consolidate their features, it won’t get off the ground, and it will eventually be killed by the next social media site that succeeds at creating the next-generation streamlined, user-friendly experience we’ve all been waiting for.
Allow users to subscribe to tags or tribes.
Currently, you can subscribe to other people’s accounts. So the content they post shows up in your feed, but you can’t subscribe to tags, categories like subscribing to subreddits on Reddit. This is a major bummer that everyone on Steemit complains about, and someone is probably already working on fixing it.
Give users a customizable home page
One of the reasons Myspace became the first major social media site is because it appealed to people’s vanity by giving everyone a customizable home page to express themselves. Facebook screwed up by not giving people this ability, but at least you have a photo page and some basic bio information in the side bar. Reddit completely dropped the ball by not even having that much. Steemit is somewhere in between Facebook and Reddit. You have a home page, but you can only customize the header, and it doesn’t allow you to put much information in it. Fixing this flaw would go a long way to enticing new users.
Make sharing other people’s content easier
Myspace had a great blogging platform that allowed users to see their friends’ blog feeds right on their home page. However, most of the activity on Myspace consisted of sharing other people’s posts. Steemit has a feature called “resteem,” which allows you to share other people’s posts, but the site’s main focus is on creating and viewing original content. I personally enjoy not seeing every cat video that every one of my friends found amusing, but most people want to share cat videos. If Steemit won’t cater to this “need,” the majority of people will use a site that does.
Put higher rewards on sharing and commenting
On every social media site, the majority of the users aren’t content creators. They’re lurkers and sharers. Currently, Steemit users receive tiny amounts of STEEM for reading, commenting and upvoting, but the only way to make any real money is by posting your own content. If this remains the case, Steemit will only retain content creators, and they’ll lose the rest of their audience. This means they’ll lose the users who make content go viral, which means Steemit will be unlikely to go viral.
Reward people for attracting new dolphins.
Users in Steemit are divided into three categories: minnows, dolphins and whales. Minnows are new users with very little voting power. Dolphins are established users who have earned a significant amount of STEEM, and whales are the biggest accounts with the most STEEM.
Steemit needs new users to grow. So it needs to incentivize its users to draw in new users. If it offered a finder’s fee, people would just create thousands of fake accounts and rake in the rewards. This could be prevented by offering a more substantial reward for attracting new users, but you only get the payout after the new user reaches certain benchmarks for posting, commenting and upvoting.
Eliminate dependency on whales
How much money a post earns on Steemit is determined by how many people upvote it. An upvote from a minnow is worth a penny. An upvote from a dolphin could be worth ten cents. A handful of upvotes from whales can be worth hundreds to thousands of dollars.
So right now, the correct way to use Steemit is to pander to whales. This means you need to write posts about things the whales are interested in. The whales are the founders and executive team members of Steemit. What they want to talk about most, is Steemit. For example, the guy in the video below made $15k in one post, which makes it sound like anyone can get rich on Steemit. The reason he made so much money is because he’s a semi-famous person promoting Steemit, which the executives wanted desperately to promote.
If Steemit remains nothing but a whale hunt, regular users will get fed up and leave. As long as most of the whales are members of the Steemit team, the site will never become much more than a Steemit circle jerk.
Give away more money.
The key to getting someone to do what you want is to give them something they want in return. The thing people want most in the world is free money. The best part about Steemit is that it gives its users free money. The more money it gives away, the more people will use it.
On the surface, Steemit’s business model is based on a “power to the people” mentality, but the actual income distribution looks more like late-stage capitalism income inequality than an egalitarian utopia. As long as Steemit’s whales keep hording the lion’s share of the money, the more likely its economy will collapse. The more money they give away, the more people will flock to Steemit and use it. Thus, the more demand there will be for STEEM. In the long run I believe the whales will make more money by keeping less for themselves and investing it in their users.